Ever tried to bargain over what you want to buy? Quoting a high price, slightly coming down, gauging how much you can reduce the price, comparing it with the market price, then finally landing at a slightly lower price than offered in the market.

Unknowingly, you have negotiated a deal, with a fair-market assessment, analyzed its dynamics, and leveraged it to your advantage. 

Fair Market Value, as its name suggests, is determined fairly by the consensus of both buyers and sellers in the market. Learn more about its meaning, calculation procedure, valuation methods and examples.

What is Fair Market Value?

Fair Value or refers to the price set for selling or purchasing an asset in the open market. Financial institutions like NBFCs and Government organizations use Fair Value while assessing the valuation of collateralized or taxed assets.

Several conditions need to be fulfilled to determine an asset's Fair Value. Buyers and sellers must have full knowledge of an asset before participating in a transaction. Their decision should not be influenced by time or any other external factors. Insurance claims, charity, property taxes, stock ownership, etc., are some transactions requiring this value.

How to Calculate the Fair Market Value?

The calculation of FMV primarily depends on the type of assets. You need to consider some factors while assessing an asset’s Fair Market Value. The uniqueness of an asset, its depreciation status, sales, liquidity, etc., are some factors to look for.

Thus, FMV depends on an appraiser’s subjective decision after assessing a specific asset class. You can also determine this value by considering the asset’s cost to its seller. You can assess it through the details of similar objects that have been sold.

Fair Market Value Valuation Methods

You can use these four methods for Fair Market Value valuation:

• Selling price

You can evaluate the Fair Market Value of an asset based on information about its recent purchase or sales price.

• Replacement charges

This method helps you determine the value of purchasing or building an asset or property using a similar asset. It helps you prepare a tax return or file an insurance claim.

• Cost of comparable assets

Real estate agents often provide you with a list of sale prices for neighbouring homes or properties when you intend to sell a property. This is known as a comparable value. You can determine an asset’s FMV using comparable costs.

• Professional opinion

You can hire an expert appraiser to know a property’s valuation. The expert will provide you with your property’s FMV.

Fair Market Value Example

Let’s assume you will sell your house. If you find a buyer willing to purchase it at your decided price or a higher price, you get a Fair Market Value for the house. It goes the same when you are planning to sell a used car. FMV is determined as per the highest bid you receive from a buyer.

As per the Indian Accounting Standard, the Fair Market Value of a property refers to the price a seller earns by selling it. However, the market value of a property depends on certain conditions. First, buyers and sellers must be aware of the property on sale and proceed in their own interest and not under pressure. Secondly, the transaction needs to be completed within a given time.

While assessing and taxing a property, the government must also determine its FMV. The difference between FMV and a property’s purchase price depends on its holding period. Generally, FMV is higher than the assessed value of a property. However, you can file a dispute if it exceeds your expected Fair Market Value.

Fair Market Value of Shares

It is assumed that marketing price data often contains errors. Thus, to assess the normal share price, you need to consider the average trading price of a particular day. Thus, the Fair Market Value of a share is determined by the latest trading price of a publicly-traded company.

Fair Market Value in Income Tax

As per Section 2(22B) of the Income Tax Act, the price of capital gains sold on a relevant period in the open market is FMV. If FMV cannot be assessed hypothetically, it is determined using this rule.

Fair Market Value vs Market Value

In Fair Market Value, both buyers and sellers could agree upon a certain price without any influence of external pressure. It generally refers to an asset's current value. Both the sellers and buyers need to agree upon a certain price in the open market to declare the FMV of a particular asset.

However, the demand and supply of a certain product determine its market value. It has little influence on an asset’s current value. Transactions in the stock market usually take place on the market value of the security.

Now that you know what is a Fair Market Value and how to assess it, you can determine the FMV of your property, car, and other assets feasibly. However, it is advisable to opt for an expert suggestion while assessing FMV to avoid miscalculations. Professionals remain updated with the recent market trends, so they can help you with accurate figures.

Related Articles

Long-Term Capital Gains

Short-Term Capital Gain

Tax on Long-term Capital Gains on Equity Funds

Short Term Capital Gain on Shares

Capital Gains Exemption

Section 54F